Chapter 3
TRACKING DOWN FUTURE EXPENSES
This chapter will start you on the road
toward a realistic look at your expenses
in retirement and how they will be
affected by inflation.
These numbers are
important clues to your
retirement mystery.
You will be looking
at your expenses today and estimating
how they will change over time and,
specifically, during two other time
periods: the day you retire 10 years from
now and over the approximate 30-year
span of your retirement. In doing so,
17
you will have some idea of whether the money you have Avoid get-
saved will be enough to last. You will also have a chance to ting stuck on the
look at your spending patterns and decide how details and giving
up because you
they could change over time. After all, you can't
don't have exact
control inflation over this stretch of time, but you
certainly can control what you spend. records of your
spending.
Your expenses will likely change
If you don’t know
as you grow older. Early on, you will
spend less on work-related things like
the exact amount
you pay for car
transportation and clothing. Maybe insurance, for example, that are one-time
you'll spend more on traveling, hobbies, or use a guesstimate until you can look it up. costs. If monthly bills for one
other things you have always wanted to do. You can always come back with more accurate item vary, like your heating bill, get a
As you age, it is likely that more of your budget will go numbers. year's worth, add them up, and divide
toward medical expenses, which you will read about soon. Don't include things like college tuition that total by 12 for an average monthly expense.
Retired people may find that recording their expenses will If you get a bill four times a year, add up a year’s
alter future spending patterns. worth and divide by 12 for an average monthly
cost. Remember to include your spouse's expenses
ABOUT WORKSHEET E (PAGE 19):
MONTHLY EXPENSES if you're married and the expenses of anyone
TODAY
First add up current monthly expenses in
“You will have a financially dependent on you.
Inflation and Your Future
Worksheet E (Monthly Expenses Today). Then in
Worksheet F, Monthly Expenses in 10 Years, take
chance to look at Inflation, in its simplest terms, means that dollar-for-dollar
spending patterns
your money will not buy as much next year as it does this
those totals and adjust them for inflation to estimate
year. This means inflation is a major factor in determining
your expenses during your first year of retirement.
how much money you will need in retirement since, to cover
Chapter 4 will look at those expenses over a 30-year
retirement and how you will be spending the and decide how inflation’s impact, you will need more money every year. In
other words, if your money is not earning more than the rate
income you just calculated. If you want a quick
estimate of how much monthly income you'll need
to cover expenses in retirement, figure on at least
they could change of inflation, you will lose part of your nest egg’s buying power.
70 percent of your preretirement income. Many
experts are now increasing that figure to 80 or
over time.”
90 percent.
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 WORKSHEET E
MONTHLY EXPENSES
TODAY
You can't know and 1 1 1
can't control future inflation. Monthly Monthly Monthly
The only accurate inflation Amount Amount Amount
rates are from the past, and they
vary widely. In 1980, overall Housing Loans Health Care (continued)
prices went up a whopping 13.5
percent; in 2002, they went up
Mortgage (Including condo fees) Car Dental
only 1.6 percent. Looking at the
past shows how rates may vary
Rent Credit card Vision
widely. Worksheet F uses the Maintenance Other Noncovered items
factor for a 3.5 percent rise in
prices for the next 10 years. But Food (at home) Workplace retirement and personal savings Travel/vacations
these are estimates, and
remember we've gotten used to Utilities Personal Care Entertainment
low inflation overall—with a
few glaring exceptions—over Electricity Hair cut Eating out
the last decade. Heat Dry cleaning Hobbies
Facing Down Internet/cable Gym Movies/theatre
Rising Costs Phones Other
One exception to low inflation Water/sewer Charitable contributions
rates is medical costs, which
have risen faster than inflation Clothing Transportation Other
over the last 20 years, and some
experts think will rise about 7 Taxes Car repairs and maintenance Gifts
percent a year over the coming Gas Membership dues
years. If you have, or your family Real estate Parking Pet-related costs
history includes, a serious
Income (state and federal) Public transportation
medical condition like heart
Other property taxes TOTAL ESTIMATED
MONTHLY EXPENSES
Insurance Health Care (other than health)

House Health insurance TOTAL ESTIMATED

Life Doctor visits MONTHLY EXPENSES
Car Hospital (health)
Disability Medicine
Long-term care Over-the-counter medicine
19 20
 disease, you will probably spend more on health care than
you ever imagined. In fact, the consulting firm of Hewitt
Associates estimates that, on average, 20 percent of retiree
income will be spent on health care.
While Medicare is a great
benefit to persons 65 and older, it
does not cover all medical costs –
deductibles, copayments, and long-term care, for
example. Medicare Part A covers hospital care only.
Medicare Part B, an additional insurance you will be offered
when you become 65, covers doctors' services, outpatient
hospital care, and things like physical and occupational
therapy and some home health care. The current cost of
Medicare Part B is about $78.20 per month, and it goes up
every year. In addition to Medicare Parts A and B, many
retirees buy Medigap policies for uncovered services like
dental and vision care and drugs. Depending upon where
you live and the policy you choose, you can pay $55 to $300 a
month. In 1999, Medicare, private insurance, and/or
Medicaid paid for only about 65 percent of retirees’ overall
health care expenses.
An additional feature that will be available starting
in 2006 is the Medicare prescription drug program
(Medicare Part D). Those eligible for Medicare Part A
and/or Part B will be able to join a prescription drug plan
offered in their area. By paying a small premium – around
$37 a month in 2006 – those who join will be able to get
prescription drugs at a lower cost. (The Resources section
on page 42 includes publications about this new program.)
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If you are thinking about retiring early, you may
have to buy health insurance until Medicare kicks in at
age 65 if your employer does not cover health care for
retirees. And you should know that employer-provided
health benefits for retirees might not be guaranteed, and
could be reduced or eliminated by your former
employer under some circumstances.
Where Will You Live
When You Retire?
Make planning for your future housing needs one of your
first priorities since where you live in retirement affects
not only your income, but also your emotional, social, and
physical well being. It is an important part of your overall
retirement strategy. While the cost of owning a home
hasn't gone up as much as health care, it is high in many
regions. Home heating and cooling costs are rising fast
too. Maintenance, condo fees, real estate taxes, and
insurance are other costs affected by inflation.
As you age, you may want to look into other types
of housing. Independent living facilities, designed for
reasonably healthy older people, often require a hefty
down payment, say $200,000, and then a monthly fee of
about $2,000. Saving for nursing home care, which in 2004
averaged $192 a day, also might make you feel more
financially secure, given that at least 40 percent of today's
65-year-old Americans will spend some time in the future
in a nursing home.
With medical and housing costs such a big part of
a retirement budget, it's no surprise that products and
services have been developed to help plan for and
manage these costs. Rising health care costs, in particular,
could consume all the money saved for retirement. One
of the more recent products developed is long-term care
insurance, which can protect retirees' assets by paying for
medical care in a nursing home and sometimes in your
own home. Premiums
vary by the features you
choose, such as the
amount of the daily
benefit paid and
protection against
inflation. The typical
annual premiums
for a 60-year old can be as high as
$2,500 a year. Buying such a policy at a later age means To cope with these
higher premiums. If you're considering a policy, future expenses, some preretirees
get some advice, because long-term care insurance is a are starting special health care savings
new product and some policyholders may find the coverage funds at work, separate from their
isn't what they need. retirement savings. One example is a new type of account,
a health savings account (HSA), which is designed to help
certain employees save for future qualified medical and
retiree health expenses on a tax-free basis. Essentially, an
HSA is a savings account into which you can deposit
“On average, money for future use. If you belong to a health plan with a
deductible of at least $1,000 (for individual coverage) or
20 percent $2,000 (for family coverage), you may be able to set up an
HSA. Individuals who don’t belong to a workplace health
of retiree income
plan can sign up for HSAs with some banks, insurance
companies, and other approved entities.
These accounts can receive contributions from
will be spent you, your employer, or even a family member on your
behalf. You can use the funds from an HSA to help offset
on health care.”
future medical costs, and the money in your account can
be carried over from year to year. In addition, this type of
account is portable; it stays with you as you move from one
employer to another or if you leave the work force. To
learn more about health savings account criteria, see the
Resources section.
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 WORKSHEET F
MONTHLY EXPENSES IN 10 YEARS (First year of retirement)

1 2 3 1 2 3
Total monthly expenses 10-year inflation factor Total expenses in 10 Total monthly expenses 10-year inflation factor Total expenses in 10
now (from monthly of 1.4106 (3.5%) years adjusted for now (from monthly of 1.4106 (3.5%) years adjusted for
expenses column in (except for health care) inflation (Columns 1x2) expenses column in (except for health care) inflation (Columns 1x2)
Worksheet E ) Worksheet E )

Housing Loans

Mortgage (Including condo fees) Car

Rent Credit card
Maintenance Other

Food (at home) Workplace retirement and personal savings

Utilities Personal Care

Electricity Hair cut

Heat Dry cleaning
Internet/cable Gym
Phones Other
Water/sewer

Clothing Transportation

Taxes Car repairs and maintenance

Gas
Real estate Parking
Income (state and federal) Public transportation
Other property taxes

Insurance Health Care For a 7% inflation factor, use 1.9672

House Health insurance

Life Medicare Part B
Car Medigap
Disability Doctor visits
Long-term care Hospital
Medicine
23 Over-the-counter medicine 24
 WORKSHEET F CONTINUED
MONTHLY EXPENSES IN 10 YEARS
(First year of retirement)
1 2 3 ABOUT WORKSHEET F (PAGE 23):
Total monthly expenses 10-year inflation factor Total expenses in 10
now (from monthly of 1.4106 (3.5%) years adjusted for MONTHLY EXPENSES IN
expenses column in
Worksheet E )
(except for health care) inflation (Columns 1x2) 10 YEARS
This worksheet will show you how inflation can Here is an example of the calculations you
increase your total expenses in your first year of will do in Worksheet F:
Health Care (continued) retirement. $200.00 (amount spent on food each month today)
You will notice that Worksheet F has room x 1.4106 (inflation factor of 3.5%)
Dental for some new types of health-related expenses
$282.12 (cost of the same food basket in 10 years)
Vision many retirees are likely to incur in retirement.
Since your home mortgage will be paid at some Note that for many mortgages and some loans,
Noncovered items point, this may be one place where money will be your payments have taken into account the rate of
freed up. You may want to use that money (or inflation. If you have a fixed mortgage or loan you
Travel/vacations other funds) as savings during retirement, will not need to do the calculation for this item.
whether to add to your nest egg for unexpected
Entertainment retirement emergencies or to plan for inflated
expenses later in your retirement.
Eating out
Hobbies
Movies/theatre
“If you want
Charitable contributions
a quick estimate,
Other
figure on at least
Gifts
Membership dues
80-90 percent of your
Pet-related costs preretirement
TOTAL MONTHLY EXPENSES income to cover
ADJUSTED FOR 10 YEARS
INFLATION (other than health) expenses.”
TOTAL MONTHLY EXPENSES
ADJUSTED FOR 10 YEARS
INFLATION (health)

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